29. Methods of encouraging managers to act in shareholders’ best interest include:

I. Threat of takeover
II. Proxy fights for control of the board of directors
III. Tying managers’ compensation to stock price performance

A. I only

B. I and II only

C. II and III only

D. I, II, and III

30. Firms that specialize in helping companies raise capital by selling securities to the public are called _________.

A. pension funds

B. investment banks

C. savings banks

D. REITs

31. In securities markets, there should be a risk-return trade-off with higher-risk assets having _________ expected returns than lower-risk assets.

A. higher

B. lower

C. the same

D. The answer cannot be determined from the information given.

32. When the market is more optimistic about a firm, its share price will ______; as a result, it will need to issue _______ shares to raise funds that are needed.

A. rise; fewer

B. fall; fewer

C. rise; more

D. fall; more

33. Security selection refers to _________.

A. choosing specific securities within each asset class

B. deciding how much to invest in each asset class

C. deciding how much to invest in the market portfolio versus the riskless asset

D. deciding how much to hedge

34. An example of a derivative security is _________.

A. a common share of General Motors

B. a call option on Intel stock

C. a Ford bond

D. a U.S. Treasury bond

35. __________ portfolio construction starts with asset allocation.

A. Bottom-up

B. Top-down

C. Upside-down

D. Side-to-side

36. Which one of the following firms falsely claimed to have a $4.8 billion bank account at Bank of America and vastly understated its debts, eventually resulting in the firm’s bankruptcy?

A. WorldCom

B. Enron

C. Parmalat

D. Global Crossing

37. Debt securities promise:

I. A fixed stream of income
II. A stream of income that is determined according to a specific formula
III. A share in the profits of the issuing entity

A. I only

B. I or II only

C. I and III only

D. II or III only

38. The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following?

A. Required that corporations have more independent directors

B. Required that the CFO personally vouch for the corporation’s financial statements

C. Required that firms could no longer employ investment bankers to sell securities to the public

D. Required the creation of a new board to oversee the auditing of public companies

39. The success of common stock investments depends on the success of _________.

A. derivative securities

B. fixed-income securities

C. the firm and its real assets

D. government methods of allocating capital

40. The historical average rate of return on large company stocks since 1926 has been _____.

A. 5%

B. 8%

C. 12%

D. 20%

41. The average rate of return on U.S. Treasury bills since 1926 was _________.

A. less than 1%

B. less than 3%

C. less than 4%

D. less than 7%

42. An example of a real asset is:

I. A college education
II. Customer goodwill
III. A patent

A. I only

B. II only

C. I and III only

D. I, II, and III

43. The 2002 law designed to improve corporate governance is titled the _____.

A. Pension Reform Act

B. ERISA

C. Financial Services Modernization Act

D. Sarbanes-Oxley Act

44. Which of the following is not a financial intermediary?

A. a mutual fund

B. an insurance company

C. a real estate brokerage firm

D. a savings and loan company

45. The combined liabilities of American households represent approximately __________ of combined assets.

A. 11%

B. 19%

C. 25%

D. 33%

46. In 2011 real assets represented approximately __________ of the total asset holdings of American households.

A. 32%

B. 42%

C. 48%

D. 55%

47. In 2011 mortgages represented approximately __________ of total liabilities and net worth of American households.

A. 12%

B. 14%

C. 28%

D. 42%

48. Liabilities equal approximately _____ of total assets for nonfinancial U.S. businesses.

A. 10%

B. 25%

C. 48%

D. 75%

49. Which of the following is not an example of a financial intermediary?

A. Goldman Sachs

B. Allstate Insurance

C. First Interstate Bank

D. IBM

50. Real assets represent about ____ of total assets for commercial banks.

A. 1%

B. 15%

C. 25%

D. 40%

51. Money market securities are characterized by:

I. Maturity less than 1 year
II. Safety of the principal investment
III. Low rates of return

A. I only

B. I and II only

C. I and III only

D. I, II, and III

52. After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of ______.

A. asset allocation

B. security analysis

C. top-down portfolio management

D. passive management

53. After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _____.

A. asset allocation

B. security analysis

C. top-down portfolio management

D. passive management

54. Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to _____.

61. Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction.

A. real; real

B. financial; financial

C. real; financial

D. financial; real

62. Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay back the loan over 5 years. In this transaction, _____.

A. a new financial asset was created

B. a financial asset was traded for a real asset

C. a financial asset was destroyed

D. a real asset was created

63. Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005?

A. General Electric

B. Parmalat

C. Enron

D. WorldCom

64. Accounting scandals can often be attributed to a particular concept in the study of finance known as the _____.

A. agency problem

B. risk-return trade-off

C. allocation of risk

D. securitization

65. An intermediary that pools and manages funds for many investors is called ______.

A. an investment company

B. a savings and loan

C. an investment banker

D. a commercial bank

66. Financial institutions that specialize in assisting corporations in primary market transactions are called _______.

A. mutual funds

B. investment bankers

C. pension funds

D. globalization specialists

67. When a pass-through mortgage security is issued, what does the issuing agency expect to receive?

A. The amount of the original loan plus a servicing fee

B. The principal and interest that are paid by the homeowner

C. The principal and interest that are paid by the homeowner, minus a servicing fee

D. The interest paid by the homeowner, plus a servicing fee

68. In 2008 the largest corporate bankruptcy in U.S. history involved the investment banking firm of ______.

A. Goldman Sachs

B. Lehman Brothers

C. Morgan Stanley

D. Merrill Lynch

69. The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder support, is a breakdown in what process or mechanism?

A. Auditing

B. Public finance

C. Corporate governance

D. Public reporting

70. Real assets are ______.

A. assets used to produce goods and services

B. always the same as financial assets

C. always equal to liabilities

D. claims on a company’s income

71. A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________.

A. private equity investments

B. securitization

C. negative analyst recommendations

D. online trading

72. In recent years the greatest dollar amount of securitization occurred for which type of loan?

A. Home mortgages

B. Credit card debt

C. Automobile loans

D. Equipment leasing

73. Which of the following is (are) true about nonconforming mortgage loans?

A. They are also known as subprime loans.

B. They have higher default risk than conforming loans.

C. They were able to be offered without due diligence.

D. All of these options are true.

74. The systemic risk that led to the financial crisis of 2008 was increased by _____.

A. collateralized debt obligations

B. subprime mortgages

C. credit default swaps

D. all of the options

75. An investment adviser has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This decision reflects which part of the investment process?

A. Asset allocation

B. Investment analysis

C. Portfolio analysis

D. Security selection

Chapter 2: ___________________________________________________________________________
1. Which of the following is not a money market instrument?

A. Treasury bill

B. Commercial paper

C. Preferred stock

D. Bankers’ acceptance

2. T-bills are issued with initial maturities of:

I. 4 weeks
II. 16 weeks
III. 26 weeks
IV. 32 weeks

A. I and II only

B. I and III only

C. I, II, and III only

D. I, II, III, and IV

3. When computing the bank discount yield, you would use ____ days in the year.

A. 260

B. 360

C. 365

D. 366

4. A dollar-denominated deposit at a London bank is called _____.

A. eurodollars

B. LIBOR

C. fed funds

D. bankers’ acceptance

5. Money market securities are sometimes referred to as cash equivalents because _____.

A. they are safe and marketable

B. they are not liquid

C. they are high-risk

D. they are low-denomination

6. The most marketable money market security is _____.

A. Treasury bills

B. bankers’ acceptances

C. certificates of deposit

D. common stock

7. The minimum tick size, or spread between prices in the Treasury bond market, is

A. 1/8 of a point.

B. 1/16 of a point.

C. 1/32 of a point.

D. 1/64 of a point.

8. An investor in a T-bill earns interest by _________.

A. receiving interest payments every 90 days

B. receiving dividend payments every 30 days

C. converting the T-bill at maturity into a higher-valued T-note

D. buying the bill at a discount from the face value to be received at maturity

9. ______ would not be included in the EAFE index.

A. Australia

B. Canada

C. France

D. Japan

10. _____ is considered to be an emerging market country.

A. France

B. Norway

C. Brazil

D. Canada

11. Which one of the following is a true statement?

A. Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors.

B. Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock.

C. Preferred stockholders have voting power.

D. Investors can sue managers for nonpayment of preferred dividends.

12. The bid price of a Treasury bill is _________.

A. the price at which the dealer in Treasury bills is willing to sell the bill

B. the price at which the dealer in Treasury bills is willing to buy the bill

C. greater than the ask price of the Treasury bill expressed in dollar terms

D. the price at which the investor can buy the Treasury bill

13. The German stock market is measured by which market index?

A. FTSE

B. Dow Jones 30

C. DAX

D. Nikkei

14. Deposits of commercial banks at the Federal Reserve are called _____.

A. bankers’ acceptances

B. federal funds

C. repurchase agreements

D. time deposits

15. Which of the following is not a true statement regarding municipal bonds?

A. A municipal bond is a debt obligation issued by state or local governments.

B. A municipal bond is a debt obligation issued by the federal government.

C. The interest income from a municipal bond is exempt from federal income taxation.

D. The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

16. Which of the following is not a characteristic of a money market instrument?

A. Liquidity

B. Marketability

C. Low risk

D. Maturity greater than 1 year

17. An individual who goes short in a futures position _____.

A. commits to delivering the underlying commodity at contract maturity

B. commits to purchasing the underlying commodity at contract maturity

C. has the right to deliver the underlying commodity at contract maturity

D. has the right to purchase the underlying commodity at contract maturity

18. Which of the following is not a nickname for an agency associated with the mortgage markets?

A. Fannie Mae

B. Freddie Mac

C. Sallie Mae

D. Ginnie Mae

19. Commercial paper is a short-term security issued by __________ to raise funds.

A. the Federal Reserve

B. the New York Stock Exchange

C. large well-known companies

D. all of these options

20. The maximum maturity on commercial paper is _____.

A. 270 days

B. 180 days

C. 90 days

D. 30 days

21. Which one of the following is a true statement regarding the Dow Jones Industrial Average?

A. It is a value-weighted average of 30 large industrial stocks.

B. It is a price-weighted average of 30 large industrial stocks.

C. It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange.

D. It is a value-weighted average of all stocks traded on the New York Stock Exchange.

I. T-bills typically sell in denominations of $10,000.
II. Income earned on T-bills is exempt from all federal taxes.
III. Income earned on T-bills is exempt from state and local taxes.

A. I only

B. I and II only

C. I and III only

D. I, II, and III

24. A bond that has no collateral is called a _________.

A. callable bond

B. debenture

C. junk bond

D. mortgage

25. A __________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date.

A. call option

B. futures contract

C. put option

D. interest rate swap

26. A T-bill quote sheet has 90-day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has a $10,000 face value, an investor could buy this bill for _____.

A. $10,000

B. $9,878.50

C. $9,877

D. $9,880.16

27. Which one of the following is a true statement regarding corporate bonds?

A. A corporate callable bond gives its holder the right to exchange it for a specified number of the company’s common shares.

B. A corporate debenture is a secured bond.

C. A corporate convertible bond gives its holder the right to exchange it for a specified number of the company’s common shares.

D. Holders of corporate bonds have voting rights in the company.

28. The yield on tax-exempt bonds is ______.

A. usually less than 50% of the yield on taxable bonds

B. normally about 90% of the yield on taxable bonds

C. greater than the yield on taxable bonds

D. less than the yield on taxable bonds

29. __________ is not a money market instrument.

A. A certificate of deposit

B. A Treasury bill

C. A Treasury bond

D. Commercial paper

30. An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturity. The investor’s actual annual rate of return on this investment is _____.

A. 4.8%

B. 4.97%

C. 5.47%

D. 5.74%

31. The U.K. stock index is the _________.

A. DAX

B. FTSE

C. GSE

D. TSE

32. A __________ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date.

A. call option

B. futures contract

C. put option

D. interest rate swap

33. Which one of the following provides the best example of securitization?

A. Convertible bond

B. Call option

C. Mortgage pass-through security

D. Preferred stock

34. Which of the following indexes are market value-weighted?

I. The NYSE Composite
II. The S&P 500
III. The Wilshire 5000

A. I and II only

B. II and III only

C. I and III only

D. I, II, and III

35. The interest rate charged by large banks in London to lend money among themselves is called _________.

A. the prime rate

B. the discount rate

C. the federal funds rate

D. LIBOR

36. A firm that has large securities holdings and wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following?

A. Reverse repurchase agreement

B. Bankers’ acceptance

C. Commercial paper

D. Repurchase agreement

37. Currently, the Dow Jones Industrial Average is computed by _________.

A. adding the prices of 30 large “blue-chip” stocks and dividing by 30

B. calculating the total market value of the 30 firms in the index and dividing by 30

C. measuring the current total market value of the 30 stocks in the index relative to the total value on the previous day

D. adding the prices of 30 large “blue-chip” stocks and dividing by a divisor adjusted for stock splits and large stock dividends

38. An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and 6.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____.

A. 5% and 6.4%

B. 5% and 5.44%

C. 4.25% and 6.4%

D. 5.75% and 5.44%

39. If a Treasury note has a bid price of $996.25, the quoted bid price in the Wall Street Journal would be _________.

A. 99:25

B. 99:63

C. 99:20

D. 99:08

40. TIPS are ______.

A. Treasury bonds that pay no interest and are sold at a discount

B. U.K. bonds that protect investors from default risk

C. securities that trade on the Toronto stock index

D. Treasury bonds that protect investors from inflation

41. The price quotations of Treasury bonds in the Wall Street Journal show a bid price of 102:12 and an ask price of 102:14. If you sell a Treasury bond, you expect to receive _________.

A. $1,024.75

B. $1,024.38

C. $1,023.75

D. $1,022.50

42. The Dow Jones Industrial Average is _________.

A. a price-weighted average

B. a value weight and average

C. an equally weighted average

D. an unweighted average

43. Investors will earn higher rates of returns on TIPS than on equivalent default-risk standard bonds if _______________.

B. it promises to pay to its holder a fixed stream of income each year

C. the preferred dividend is a tax-deductible expense for the firm

D. in the event of bankruptcy preferred stock has equal status with debt

45. Which of the following does not approximate the performance of a buy-and-hold portfolio strategy?

A. An equally weighted index

B. A price-weighted index

C. A value-weighted index

D. All of these options (Weights are not a factor in this situation.)

46. In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs _________.

A. automatically

B. by adjusting the divisor

C. by adjusting the numerator

D. by adjusting the market value weights

47. Suppose the market prices of the 30 stocks in the Dow Jones Industrial Average all change by the same dollar amount on a given day. Assuming there are no stock splits, which stock will have the greatest impact on the average?

A. The one with the highest price

B. The one with the lowest price

C. All 30 stocks will have the same impact.

D. The answer cannot be determined from the information given.

48. A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket, this bond would provide you with an equivalent taxable yield of _________.

A. 4.5%

B. 7.25%

C. 8.68%

D. none of these options

49. The purchase of a futures contract gives the buyer _________.

A. the right to buy an item at a specified price

B. the right to sell an item at a specified price

C. the obligation to buy an item at a specified price

D. the obligation to sell an item at a specified price

50. Ownership of a put option entitles the owner to the __________ to ___________ a specific stock, on or before a specific date, at a specific price.

A. right; buy

B. right; sell

C. obligation; buy

D. obligation; sell

51. An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond or a corporate bond. She looks up municipal bond yields (rm) but wishes to calculate the taxable equivalent yield r. The formula she should use is given by ______.

A. r = rm × (1 – 28%)

B. r = rm/(1 – 72%)

C. r = rm × (1 – 72%)

D. r = rm/(1 – 28%)

52. June call and put options on King Books Inc. are available with exercise prices of $30, $35, and $40. Among the different exercise prices, the call option with the _____ exercise price and the put option with the _____ exercise price will have the greatest value.

A. $40; $30

B. $30; $40

C. $35; $35

D. $40; $40

53. Ownership of a call option entitles the owner to the __________ to __________ a specific stock, on or before a specific date, at a specific price.

A. right; buy

B. right; sell

C. obligation; buy

D. obligation; sell

54. The ________ the ratio of municipal bond yields to corporate bond yields, the _________ the cutoff tax bracket at which more individuals will prefer to hold municipal debt.

A. higher; lower

B. lower; lower

C. higher; higher

D. The answer cannot be determined without more information.

55. Which of the following types of bonds are excluded from most bond indexes?

A. Corporate bonds

B. Junk bonds

C. Municipal bonds

D. None of these options

56. The Hang Seng index reflects market performance on which of the following major stock markets?

A. Japan

B. Singapore

C. Taiwan

D. Hong Kong

57. The Standard & Poor’s 500 is __________ weighted index.

A. an equally

B. a price-

C. a value-

D. a share-

58. A firm that fails to pay dividends on its preferred stock is said to be _________.

A. insolvent

B. in arrears

C. insufferable

D. delinquent

59. Large well-known companies often issue their own short-term unsecured debt notes directly to the public, rather than borrowing from banks; their notes are called _________.

A. certificates of deposit

B. repurchase agreements

C. bankers’ acceptances

D. commercial paper

60. Which of the following is most like a short-term collateralized loan?

A. Certificate of deposit

B. Repurchase agreement

C. Bankers’ acceptance

D. Commercial paper

61. Eurodollars are _________.

A. dollar-denominated deposits at any foreign bank or foreign branch of an American bank

B. dollar-denominated bonds issued by firms outside their home market

C. currency issued by Euro Disney and traded in France

D. dollars that wind up in banks as a result of money-laundering activities

62. Which of the following is used to back international sales of goods and services?

A. Certificate of deposit

B. Bankers’ acceptance

C. Eurodollar deposits

D. Commercial paper

63. Treasury notes have initial maturities between ________ years.

A. 2 and 4

B. 5 and 10

C. 10 and 30

D. 1 and 10

64. Which of the following is not a characteristic of common stock ownership?

A. Residual claimant

B. Unlimited liability

C. Voting rights

D. Limited life of the security

65. If you thought prices of stock would be rising over the next few months, you might want to __________________ on the stock.

A. purchase a call option

B. purchase a put option

C. sell a futures contract

D. place a short-sale order

66. A typical bond price quote includes all but which one of the following?

A. Daily high price for the bond

B. Closing bond price

C. Yield to maturity

D. Dividend yield

67. What are business firms most likely to use derivative securities for?

A. Hedging

B. Speculating

C. Doing calculus problems

D. Market making

68. What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001?

A. No change, as both yields will remain the same

B. Increase, as the spread usually increases in response to a crisis

C. Decrease, as the spread usually decreases in response to a crisis

D. No change, as both yields will move in the same direction

69. A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been ______ per share.

A. $0.55

B. $1.80

C. $0.45

D. $1.25

70. Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million, and $150 million, respectively. If you were to construct a price-weighted index of the three stocks, what would be the index value?

A. 300

B. 39

C. 43

D. 30

71. Which of the following is not considered a money market investment?

A. Bankers’ acceptance

B. Eurodollar

C. Repurchase agreement

D. Treasury note

72. The Federal Reserve Board of Governors directly controls which of the following interest rates?

A. Bankers’ acceptances

B. Brokers’ calls

C. Federal funds

D. LIBOR

73. You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wanted to construct an index to track your portfolio performance, your best match for your portfolio would be to construct ______.

A. a value-weighted index

B. an equally weighted index

C. a price-weighted index

D. a bond price index

74. In a ___________ index, changes in the value of the stock with the greatest market value will move the index value the most, everything else equal.

A. value-weighted index

B. equally weighted index

C. price-weighted index

D. bond price index

75. A corporation in a 34% tax bracket invests in the preferred stock of another company and earns a 6% pretax rate of return. An individual investor in a 15% tax bracket invests in the same preferred stock and earns the same pretax return. The after-tax return to the corporation is _______, and the after-tax return to the individual investor is _______.

A. 3.96%; 5.1%

B. 5.39%; 5.1%

C. 6%; 6%

D. 3.96%; 6%

76. All but which one of the following indices is value weighted?

A. NASDAQ Composite

B. S&P 500

C. Wilshire 5000

D. DJIA

77. What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%?

A. 6.48%

B. 7.25%

C. 8.02%

D. 9%

78. A tax free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield on the bond given a 35% tax bracket?

A. 3.2%

B. 3.68%

C. 4.92%

D. 5%

79. An index computed from a simple average of returns is a/an _____.

A. equal weighted index

B. value weighted index

C. price weighted index

D. share weighted index

80. A tax free municipal bond provides a yield of 2.34%. What is the equivalent taxable yield on the bond given a 28% tax bracket?

A. 2.34%

B. 2.68%

C. 3.25%

D. 4.92%

81. The Chompers Index is a price weighted stock index based on the 3 largest fast food chains. The stock prices for the three stocks are $54, $23, and $44. What is the price weighted index value of the Chompers Index?

A. 23.43

B. 35.36

C. 40.33

D. 49.58

82. The Hydro Index is a price weighted stock index based on the 5 largest boat manufacturers in the nation. The stock prices for the five stocks are $10, $20, $80, $50 and $40. The price of the last stock was just split 2 for 1 and the stock price was halved from $40 to $20. What is the new divisor for a price weighted index?

A. 5.00

B. 4.85

C. 4.50

D. 4.75

83. A benchmark index has three stocks priced at $23, $43, and $56. The number of outstanding shares for each is 350,000 shares, 405,000 shares, and 553,000 shares, respectively. If the market value weighted index was 970 yesterday and the prices changed to $23, $41, and $58, what is the new index value?

A. 960

B. 970

C. 975

D. 985

84. A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced at $12, $20, and $60. The number of outstanding shares for each is 600,000 shares, 500,000 shares, and 200,000 shares, respectively. If the stock prices changed to $16, $18, and $62 today respectively, what is the 1-day rate of return on the index?

A. 5.78%

B. 4.35%

C. 6.16%

D. 7.42%

85. Which of the following mortgage scenarios will benefit the homeowner the most?

A. Adjustable rate mortgage when interest rate increases.

B. Fixed rate mortgage when interest rates falls.

C. Fixed rate mortgage when interest rate rises.

D. None of these options, as the banker’s interest will always be protected.

86. The TED spread refers to

A. the difference between the Treasury bond rate and the Treasury bill rate.

B. the difference between the Treasury note rate and the Treasury bill rate.